Revenue form operations provide primary source of cash, but some txns not reflected in the income statement (borrowing money, paying cash dividends, purchasing long-lived assets) may significantly increase or decrease cash.

a number of txns (borrowing, issuing new stock, or buying capital assets) greatly affect cash but do not appear in the income statement for the period and emerge on the balance sheet at the end of the period.

Common Cash Inflows:

sales for cash

collection of accts receivable

short and long-term borrowings

sale of property, plant and equipment

issuance of stock for cash

Common Cash Outflows:

operating expense

acquisition of property, plant, equipment or other long-term assets

repayment of short and long-term debt

distributions to owners

Statement of Cash Flows: reports the changes in cash and cash equivalents during acctg period and explains those changes.

co’s that use indirect method must also disclose the amts of interests and income taxes paid during that period either on the face of the statements of cash flows or in the notes to the financial statements

indirect op section must also report changes in inventory, receivables and payables

investing activities:

incl acquiring and disposing of long-term investments and long-lived assets

cash expenditures to acquire other co’s through merger or stock acquisition

not required to report on the statement of cash flows → but must disclose in the footnotes

DISCLOSURES

disclose policy for determining which items are cash equivalent, if change policy and must disclose that

CONSOLIDATED FINANCIAL STATEMENTS (132)

defn: aggregate financial data for a parent co and its majority and wholly owned subs as if the parent and subs constitute a sgl acctg entity.

SUMMARY on p.136

“intra-family” obligations/liabilities do not belong on the composite picture, an accountant would eliminate any liabilities btw X and Y in the consolidation process by canceling the receivable in one corp’s accts agst the payable on the other corp’s books. (135)

retained earnings is the same after txn bc it is the parent’s retained earnings (parent is in effect buying Y’s net assets incl the retained earnings)

eliminate parent’s investment in the sub, substituting instead the sub’s assets and liabilities. Also eliminate the sub’s equity accts and any intercompany txns →avoid duplication and premature revenue recognition

e.g. must subtract from parent’s cash account (or asset account) the sub’s total assets bc that is how much the parent invested in the sub. On the consolidated balance sheet, an add’l account for “investments” would be added. (133 – look at example)

after subtracting from cash account, on the consolidated balance sheet, must once again reflect the sub’s ind cash and plant account and add to parent’s accounts to get net amt.

common stock reflects the common stock of the parent (it does not change)

each share of capital stock in a corp is a proportionate interest in the equity of the corp

consolidating financial statements incl not only consolidated financial statements, but also the financial statements of the consolidated group’s ind components in diff columns plus column for any eliminations (p.136)

combined financial statements aggregate accts of commonly controlled co.s that do not share a corp parent

e.g. an ind may own shares in both X corp and Y corp

present no only combined statements but also the sep financial statements for each member of the combined grp plus a sep column for any eliminations

STEPS: subtract investment from cash of parent, then get = Investment – (total assets of sub – liabilities of sub) and add to parent’s cash, also add the cash of sub to get total cash for consolidated balance sheet.

The Need for Accounting Principles (141-146)

So users can compare one enterprise to another, and from successive periods.

Managers may not be the most objective reporters of their own performance

Indep Auditor:

check on underlying facts represented in fin stmts

review of principles applied in portraying the info

SEC has authority to estb acctg principles but has deferred to acctg profession

Congress has implicitly retained the power to mandate acctg principles

registrant: 500 or more owners and $10M

How do Acctg Principles Become Generally Accepted? (p.167)

GAAP Hierarchy (168)

Category a: officially promulgated by a body that the AIPCA Council has designated to establish such principles under Rule 203 of AICPA Code of Professional Conduct

auditor conducted the audit in accordance with generally accepted auditing stds which require the auditor to plan and perform the audit to obtain reasonable assurance that the financial statements do not contain material misstatements

financial statements present fairly in all material respects, the financial position, the results of operations and cash flows in conformity with GAAP.

Incentives for estb strong internal controls (213)

Sentencing Guidelines

reduced penalties: offers leniency to wrongdoers that can show they have estb a strong internal control

enormous losses due to inadequate internal controls

derivatives: financial contracts that base their value on some underlying asset, such as bonds or foreign currencies

properly used derivatives offer co.s the ability to manage and transfer risk but at the same time, can provide a recipe for financial disaster

Establishing Generally accepted auditing stds:

SEC deferred to acctg profession on auditing stds→ acctg profession turned responsibility to develop and promulgate GAAP to FASB, but the corresponding duty to set auditing stds still lie with the AICPA through the ASB (auditing stds board)

Regulations S-X and S-B (sml business): (220)

address accountants qualifications, provide rules regarding the form and content for financial statements

can’t audit if CPA or CPA’s firm or member of the firm owns financial interest with co or subsidiaries

if mgmt does not take remedial measures and auditor reasonably believes failure to do so would warrant either departure form auditor’s std report or resignation form the audit engagement → then must report to board of directors

client/registrant must then notify SEC within one business day and the auditor, if auditor doesn’t receive in one b day then report to SEC

defn: sum to which an amt or series of periodic and equal amts will grow at the end of a certain time, invested at a particular compound interest rate.

FV = amt which current principal (p) will grow at the end of (n) periods, invested at (i) compound interest rate.

FV of a sgl amt compounded interest annually

Example 5 (281)

40,000 invested from 1901-2000 @ 5% compounded annually

40,000 x .05 x 99

first find factor for 50 periods = 11.46740, which tells us that one dollar will grow to abt 11.47 if invested at 5% compound interest for 50 yrs → 458,696

40,000 x 11.46740 = 458,696

next find factor for 40 yrs = 7.03999

458,696 x 7.03999 = 3,229215.25 (the 458,696 @ the end of 90 yrs)

finally take the factor for 9 periods = 1.55133

3,229215.25 x 1.55133 = 5,009578.49 after 99 yrs

FV of sgl amt compound semiannually

10,000 @ 8% compounded semiannually, how much at the end of 10 yrs?

in 10 yrs will be compounded 20 times, every six months earn 4% interest

find 4% interest for 20 periods = 2.19112

10,000 x 2.19112 = 21,911.20

10,000 @ 8% compounded quarterly, how much at the end of 10 yrs?

at end of 10 yrs will have compounded 40 times, every 3 months earn 2% interest

find 2% interest for 40 periods using Table I = 2.20804

10,000 x 2.20804 = 22,080.40

Rule of 72s or Doubling an Investment (283)

dividing 72 by t.he interest rate gives us the approximate number of yrs in which an investment will dbl at compound interest

e.g. if 8%, 72/8 = 9, look at table and it tells you that 8% in 9 periods will = 1.99900 (close to dbl)

e.g. for 25 yr old to get 1M by 65 (p.284)

annuity: (285)

refers to a sequence of periodic and equal amts at regular time intervals

Ordinary annuity (annuity in arrears): investor start making payments at the end rather than at the beginning of the first period

e.g. if investor contributes 1,000 at the end of each yr for 4 yrs at 5% compounded annually

the first payment will compound 3 times at the end of 4 yrs

2nd payment will compound 2 times

3rd payment will compound once

and 4th payment does not earn any interest

Table II (uses future value factors from Table I for sgl amts to calc the FV factors for an ordinary annuity) → shortcut to the above calc bc will give you the same number just by looking at the number of payments and the interest rate.

the more frequently we compound interest the lower the present value drops, bc more frequent compounding produces higher effective rate of interest, a higher effective rate of interest means that we can invest less now, which means a lower present value, to arrive at a given sum in the future.

Annuities (292)

someone promises to make a series of equal payments

Ordinary Annuity: Use Table VI → PV of Annuity

withdrawal at the end of the yr

e.g. S promises to pay 1000 at the end of each yr for 4 yrs. S can earn 8% on his investments, how much would S have to invest now to meet his promise?

could use Table III and calc each year separately and add the factors together to get 3.31213 (4 periods)

OR use Table VI for PV of annuity

example 13: PV of ordinary annuity

1,000,000 payable 100,000 at the end of each yr for 10 yrs at 7% compounded annually, what is the PV of the sweepstakes payments?

100,000 x 7.02358

Annuity Due (295)

do not discount the first withdrawal bc at the beginning of the yr and investor withdraws at the same time as the investment

receiving payment at the beginning of each yr will result in larger amt

payable 100,000 at the beginning of each yr for 10 yrs with 7% interest compounded annually.

100,000 x (6.51523 +1) = 751,523

instead of 10 periods, you would subtract one period to get 9 and find the PV factor for 9 at 7%

Calculating Amt of Annuity Payment (297)

Ordinary Annuity e.g. J borrows 100,000 for 5 yrs at 10%. Lender requires payment of the loan through equal annual payments at the end of each yr for 5 yrs. Lender will credit each payment to accrued interest first then to principal. What annual payment will lender require J to make?

Value of bonds varies inversely with the current mkt interest rate. When the mkt interest rate rise → value of bonds ↓, when market interest rate ↓→ the value of bonds increase.

RETIRMENT PLANNING

e.g. if at 35 wantes to make equal annual payments at the end of each yr until 65 so can withdraw 60,000 per yr for 20 yrs staring one yr after he retirement, what annual payment must you make assuming 8% interest compounded annually?

equation: (cash and equivalents + short term investments + receivables) / current liabilities

ignores prepaid expenses and inventories

ratio of 1 will be satisfactory

assumption in this test is that the co will not be able to sell any more inventory

Leverage Ratios: debt to equity, debt to total assets to assess the overall ability to pay its debts (long-term analysis)

Leverage: the greater the proportion of debt, the more highly leveraged the co.

Debt to Equity ratio:

formula: total liabilities/total owners’ equity

debt to equity ratio provide lenders with some indication abt he likelihood that the business will repay a loan.

creditors get paid before SHs in any liquidation

Debt to Total Assets: (p.326) compare debt to sum of debt and equity

formula: total liabilities / total assets

total assets = liabilities - assets

defn of debt can vary

Net Book Value: the difference btw the co’s assets and its liabilities as reflected in the co’s acctg records, usually expressed as an amt per outstanding common share or other ownership interest. (326)

formula: net book value attributable to common shares/common shares outstanding

balance sheet not stated at mkt value, so the ratios are only as good as the balance sheet

business’ net book value does not reflect what a buyer might pay for the business.

Income Stmt (330) – can use this to predict how the co will perform in the future

Results of Operations (331) – states the operating results for a particular period

should pay attn to unusual or nonrecurring items which affect the income stmt in one period but which will not affect subsequent periods. (e.g. mergers)

txns that do not directly relate to operations:

e.g. selling a manufacturing plant → should co create “Extraordinary Item” account for this unusual txn in the income stmt for the current period?

including it on the income stmt may lead some investors who only look at net income to falsely reach conclusions abt a co. when comparing to previous yrs’ operations.

prior period adjustment (334): bypasses the income stmt connoting the fact that a direct entry to Retained Earnings adjusts the results from a prior period bc an item which the co realized currently really belongs in a prior period. This process presents a problem: may cloud the accuracy of a particular income stmt by excluding such an item from the entire series of income stmts.

GAAP limited prior period adjustments to corrections of errors in financial stmts for a previous period. Must correct as soon as discovered cannot amortize over some period of time.

co debits or credits the appropriate asset or liability accts and records a corresponding adjustment directly to the beginning balance in the Retained Earnings account.

such treatment does not affect income stmt

e.g. yr 1 = improper recognition of 100,000 revenue in txns on open acct which included a rt of return. If only expenses incl: 60,000 in cost of goods sold, 15,000 in sales commissions which were prepaid, co must eliminate the 25,000 profit from retained earnings.

Inventory 60,000

Prepaid Sales Commission 15,000

Retained Earnings 25,000

Accts Receivable 100,000

Discontinued Operations (335): distinct business that a co decides to sell or eliminate (e.g. sub, division, dept or joint venture). Getting rid of the whole line of business.

to qualify:

co must clearly distinguish component’s assets

operating results and activities from the co’s other assets

operating results and activities (not only physically but operationally, but also financially)

must report in 2 sep components before income from “extraordinary items”

income or loss from discontinued operations: incl

segment’s operating income or loss less applicable incomes taxes for the period from the beginning of current yr to date.

gain or loss on disposal:

reflects the income or loss from divesting the segment less applicable income taxes.

must estimate if will not occur until after the end of the yr to the disposal date.

If co expects loss from disposal: co must incl estimated loss in the net income for the yr

If co expects gain from disposal: co must wait until it realizes the income which usually occurs at the closing of the disposal date to recognize revenue.

Activities that do not qualify:

asset disposal incident to a co’s evolution such as eliminating a line of business

transferring production or mkting activites from one location to antoher

phasing out a product line or service

other changes that technological improvements may occasion.

Extraordinary Items (336): gains or losses from txns other than the sale, abandonment of a business segment that qualify as both unusual in nature and infrequent in occurrence.

To qualify:

must possess a higher degree of abnormality and not relate to or only incidentally relate to a co’s ordinary activities.

infrequent reqmt: co must not rsnbly expect the txn to recur in the foresseable future.

must consider the nature of the business to det infrequency or unusualness.

GAAP: says gains and loses from extinguishing debt is extraordinary items without regard to frequency and other reqmts.

“extraordinary items” appear in a sep section on the income stmt after discontinued operations and following the caption “ Income before Extraordinary Items”

Changes in Acctg Principles and Estimates (337)

acctg principle: incl not only accounting principles and practices, but the methods that a co uses to apply them.

e.g. from first in, first out → last in, last out when acctg for inventories.

acctg estimates:

e.g. changes in estimtates that arise in connection with the depreciation or amortization of any asset over a # of yrs.

the estimate of useful life may not be as long as predicted.

APB Opinion Require account for changes in estimates in either:

period of change, if change affects that period only

OR period of change and future periods if the change affects both.

Change in acctg principle requires: (list on 338)

disclosure: must disclose the change

report its effect on income, net of income taxes, and expln why the new acctg method qualifies as “preferable”

concern abt consistency, so can only change if the new principle is more “preferable”

e.g. if 100,000,000 shares issued at $1 par and is currently traded for $20, if corp declares a 10% stock dividend (will increase the outstanding shares to 110,000,000)

Retained earnings 200,000,000

(10,000,000 newly issued

shares at $20)

common stock, $1 par 10,000,000

additional paid in capital 190,000,000

(to record the 10% stock dividend)

ARB 43: allows corps which issue add’l shares exceeding 25% of the number of previously outstanding shares to transfer only the amt which applicable corp stat requires from retained earnings to the appropriate capital stock acct.

e.g. if 50% stock dividend → no need to make transfer to add’l paid in capital acct, only needs to put 50,000,000 to the common stock acct.

TREATMENT UNDER THE LEGAL CAPITAL SYSTEM (388)

stated capital must always = or exceed the # of issued shares times the par value per share.

stock dividend

must transfer from available surplus to stated capital the amt necessary to reflect the add’l shares issued.

corporate law statutes and creditor’s rts statutes(392) – 4 categories, most states apply a combo of the 4 and there are diff stats for redemptions, will make directors liable for amt that corp unlawfully distributed UNLESS show defense. (p.394 for example)

Any surplus: a corp may distribute amts to SHs any time the corp’s surplus (capital or earned) exceeds the proposed distribution

distribution can’t be more than the net assets (add’l paid in capital + retained earnings)

add’l paid in capital = capital surplus

reduction surplus to declare dividends which exceed the net assets: can increase or decrease stated capital by changing the par value thereby changing it to surplus which goes into the retained earnings account allowing for more distribution (must amend the charter)

Earned Surplus: can distribute any time earned surplus exceeds the contemplated distribution

assets remaining must at least = to stated capital + capital surplus

exceptions:

if no earned surplus exists: can distribute from capital surplus

second situation allows if satisfy 4 conditions (listed on 395)

income stmt tests

insolvency limitations

financial ratios

creditors’ rights statutes

protect creditors from distributions which leave corp

more liabilities than assets

not enough liquid resources to pay bills

an unrsnbly small amount of capital for continuing ops

Consolidated Financial Stmts (521), also CH. 1 (132-137)

if co owns 20% but not more than 50%- GAAP presumes that co can exercise significant influence and treats as “active” investments.

cost method: treat each txn at cost

only reports income when investor (sub) declares a dividend

p.526 X would have to wait for Y to declare a dividend before reflecting any of Y’s post-acquisition earnings on X’s fin stmts.

just use equity method to account for investments (524): intermediate method bc X’s balance sheet only shows its investment in Y rather than Y’s net assets, however will reflect subsequent earnings or losses whether or not Y declares any dividends.

bc does not own majority, when adding to investment the sub’s post-acquisition earnings, can only add half of the earnings.(526)

initially record at cost, then adjust to recognize the investing co (sub’s) share of the investee’s (parent) earnings or losses after the acquisition date. (investor’s share of the periodic net income of the investee is recorded as an increase in the investment acct and as revenue for the period)

pro rata method

investing co (sub) also adjusts the investment in the investee to reflect its share of changes in the investee’s capital. (investor’s share of cash dividends from the investee is recorded as an increase in cash acct and a decrease in the investment acct)

if co owns more than 50% - must prepare consolidated fin stmts.

combine financial data for a parent co and its majority owned subs as if the parent and subs rep a sgl acctg entity.

How a parent co should reflect a sub’s earning subsequent to acquisition:

Sales Allowances: seller grants a deduction in price to the customer (maybe for a defect etc)

Gross Profit and Multi step Income (p.107)

co.s derive revenues and incur expenses from normal operating activities while gains and losses flow from peripheral or incidental txns

non-op section: e.g. rental income, interest income, fire damage etc.

in Multi Step Income – shows non-op immediately after the co’s op income and nets the non-op items.

in Sgl step Income – 2 categories

revenues (both op revenues and gains)

expenses (cost of goods sold, op expenses and losses)

Periodic Inventory (109) – taking inventory at the end of a period

cost of goods sold is an expense:

so debit means increase in account (since on the rt side of T account) and credit means decrease in the account

whatever is left unsold is debited to inventory and credited to cost of goods sold (this is really deferral bc this is an overstmt that hasn’t been realized yet)

deferral: the cost of merchandise remaining should not be incl as an expense of the current period but rather deferred to later periods.

closing inventory = deferred cost of goods sold expense (p.111)

Total inventory/costs incurred – Costs deferred to later period = costs allocable to current period

helps co to det the expense for goods actually sold during an acctg period

add opening inventory and purchases for the period (debit side of the cost of goods sold acct)

Cost of Goods Sold 2,100

(beginning inventory =

number of items * cost per item)

Inventory 2,100

Cost of Goods Sold 8,400

Purchases (of new inventory) 8,400

beginning inventory + purchases = cost of goods available for sale

cost of goods avail for sale – closing inventory (unsold inventory) = cost of goods sold during the period

Inventory 3,500

Cost of Goods Sold 3,500

can refer to ending inventory acct as “deferred cost of goods sold expense” bc cutting down the expense applicable to current period but creating an asset to defer a portion of an expense for later period.

direct relationship btw ending inventory and net income:

as we defer more costs to later periods → ending inventory ↑ and cost of goods sold ↓ which ↑ the net income for the period.

allocate more costs to current period and ↑ the cost of goods sold, ending inventory ↓ and net income ↓.

Overstating and Understating Effects: (690)

e.g. overstating or understating ending inventory 10,000 on cost of goods sold and net income.

if overstate ending inventory → net income will be overstated, and beginning inventory will also be overstated → which means the cost of goods sold will be overstated on next period→ which will produce lower earnings.

understate ending inventory → net income will be understated and beginning inventory will be understated → which means that cost of goods sold will be understated on next period → which will reduce net income next period.

CONTINGENCIES (611) – Chap. 7

conditional gains or losses: may or may not occur and how to deal with such a txn in terms of the matching principle bc requires co to match expenses with the revenues that they helped to produce.

could create a special “contingent liability”

if do not record in the present period and there is a refund, refund does not qualify as a “prior period adjustment”

if based on “previous experience” co knows that there will ultimately bc some refunds, then should estimate the amt and record in current period. (612)

Diff from “unliquidated liability: that is where the co has incurred an expense or loss attributable to the current period, but uncertain as to the amt.

must estimate the likely amt

if can’t estimate, disclose in the footnote

Unasserted Claims (630):

must first assess the probability of the assertion.

if assertion seems probable, then must proceed in the same manner as loss contingency.

GAAP and MD&A may estb diff stds:

if MD&A rules impose a higher std, co can comply with GAAP stds but still be found liable under MD&A.

Table (630) – acctg treatment for asserted claims

FASB 5: acctg rules on contingencies (617)

estimates are required for on-going and recurring activities

e.g. depreciation is an estimate but does not make this a contingency

GAIN CONTINGENCY (631):

your client expects to receive a reward but you don’t book gained contingencies due to conservative principle

co should disclose gain contingencies but should not overstate the likelihood of the contingency to materialize.

LOSS CONTINGENCY (618): (1)if there has been a loss or impairment of an asset or the incurrence of liability OR it’s probable that there will be a loss or incurrence of liability and you can (2)rsnbly estimate the amt, and (3) the event occurred on or prior to the date of the fin stmts, the co must accrue an amt for this loss and also disclose it.

event has to occur prior to the date of fin stmts = date that fin stmts are being examined (619)

if the event/discovery of event occurred after the date of fin stmts but prior to stmts being issued, then must disclose and put in footnote

atty has to make assessment as to likeliness, if probable then see if able to estimate an amt

if all these conditions are met, then must book the liability (FASB rule says that co should at least book the low range of the liability)

if can’t estimate an amt, then just disclose (doesn’t matter when the event occurred)

disclosure shall indicate the nature of the contingency, and give an estimate of the possible loss or range of loss or state that such an estimate cannot be made.

Likeliness (FAS defn) (618)

Probable: the future event is likely to occur.

Reasonably Possible: chance of event occurring is more than remote but less than likely.

Remote: change of event occurring is slight.

ABA defn (652) – diff from FAS

probable: an unfavorable outcome for the client is probable if the prospects of the claimant not succeeding are judged to be extremely doubtful and the prospects for success by the client in its defense are judges to be slight

remote: unfavorable outcome is remote if the prospects for the client not succeeding in its defense are judged to be extremely doubtful and the prospects of success by the claimant are judged to be slight.

Examples of loss contingencies: when co has loss contingencies, they set up reserves.

collectibility of receivables

obligations related to product warranties and product defects

risk of loss or damage of co’s property by fire, explosion or other hazards.

threat of expropriation of assets

pending or threatened litigation

actual or possible claims and assessments

guarantees of indebtedness of others.

acctg profession and legal profession got together to deal with what auditors need in terms of evid from lawyers (648)

rule that is in both the FASB and ABA: atty acknowledges to the auditor, that whatever the atty becomes aware of the atty is obligated to inform their client.

atty agrees to tell client, and the auditor looks to the client, way of dealing with the issue so that atty doesn’t have go directly to the auditor that something has to get disclosed, concerned with confidentiality issues.

Difference btw acctg profession and legal profession (654):

conflicting interests

diff terms with diff defns

std for unasserted claims is diff:

FAS 5: if probable (likely to occur) must accrue, disclose or both.

ABA stmt: considers an unasserted claim “probable only when the prospects of its being asserted seem rsnbly certain and the prospects of non-assertion seem slight.

when public co file offering docs → stmts are incl in the docs are usually 3 yrs of annual stmts AND quarterly financial stmts on a comparative basis.

when offering docs are filed with SEC → atty’s letters are requested and sent prior to the docs are filed with the SEC and sent again prior to time co plans to go effective with their offering.

lawyer’s professional responsibility (653) – specific lang that is in the inquiry letter and also in the response by the atty confirming the fact that the atty will inform the client of things that need to be disclosed.

Unidentifiable: inherent in a business, attached to business as a whole (going concern value; goodwill – the amt by which a business’s purchase price exceeds the sum of the fair values of its identifiable net assets.

goodwill does not need to be amortized under new rule bc indefinite life (new rule already in effect) (p.808)

the costs are treated as “current expense”

can’t purchase or sell separately

going concern value: add’l value that attaches to properties which constitute an ongoing business

e.g. txn of 800,000 that includes plant and inventory in an unspecified amt, the allocation matters bc the amt allocated to inventory will turn into cost of goods sold expense, while the co will expense the cost assigned to the plant much more slowly.

will allocate to stated capital or capital surplus

if get 100,000 add’l in good will then must incl as “good will” on balance sheet and amortize that amt.

acquiring such an asset would require you to add amt to may be the “long term asset” and have to amortize by adding to “depreciation expense”

e.g. if txn is made by transfer of stock

must try to det fair mkt value of shares

GAAP: requires co to record the costs to acquire intangible (identifiable or unidentifiable) as an ASSET and to amortize costs over the intabigles’ estimated useful life (may not exceed 40 yrs)

financial stmt should disclose how co treats intangibles and what amortization method and which periods.

Business Combinations (811)

Purchase method (816): assumes that the acquiring co “purchased” the net assets of the other co, bringing together 2 previously sep businesses into a sgl accounting entity

acquiring co adds to its own assets the target’s assets (valued at the acquisition cost)

if the purchase price exceeds the fair value of the assets, record the excess as “goodwill” and amortize (but under new rule does not need to be amortized) see p.808

if the purchase price exceeds the sum of the fair mkt values of the specific and sep identified assets, the acquiring co records the excess as goodwill.

goodwill needs to be amortized

negative goodwill: fair value of assets acquired may exceed the consideration paid to acquire the co.

Pooling Method: treats the combination as a continuation of the previous ownership interests

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